is depreciation an opportunity cost?

trying to figure out if it would be included in the calculation of economic profit or not. def on the test in one form or another.

yeah what’s the diff between economic income, and accounting income?

Depreciation is not an opportunity cost. Depreciation is a non-cash expense that reflects the spreading out of your initial capital expenditure cost over the multiple periods over which that asset is used to run your business. Now, an opportunity cost is something like normal profit. If you are running your own business, you could also be working at mcdonalds flipping burgers and making minimum wage. The foregone mcdonalds burger pay is an opportunity cost that you incur when deciding to run your own business instead. Now, technically, the opportunity cost should reflect the next best use of your time. So, it’s unlike that the mcjob is your opportunity cost. It’s probably something better (since you’re all so smart :slight_smile:

CFAI mock 1 has depreciation as an opportunity cost - def not in the books. wish i could see the question again to verify. depreciation = loss of investment that could have been making interest over same time period…makes sense that it would be an opportunity cost. wouldnt it be the OC of the investment for that given period? this is gonna kill me.

You must be missing something from the question because that is not correct. Did it specify something regarding economic versus accounting depreciation? What was the subject matter? Alt investment valuation?

It was a question on calculating Accounting and Economic profit. Econ profit = Acc profit - opportunity costs as far as i remember. So in this case, Depreciation is deducted at the Accounting bottom line which in a way affects Econ bottom line as well.

Well, your accounting profit should already have taken into acocunt the depreciation expense. To do so again, unless the question laid out a separate value for economic depreciation in excess of accounting depreciation, would be a double count.

Here is the question Total rev 300000 Value of buildings and machinary at begining of the year 300000 at the end of the year 280000 Cost of the materials 100000 wages paid during the year 50000 Normal profit for the year 40000 what is the economic profit a 90000 b 110000 c 130000 d150000

is it 130K?


Economic Profit = 300 - (100+50+40) - (300-280) = 90000 Economic depreciation is 300-280

As i expected… that is economic depreciation. The building has actually lost value. It is not accounting depreciation.

thought we did not have to subtract normal profit???

For economic, you do have to subtract normal profit. FOr accounting, you do not.

got it, thank you. do you know where in the text is this? would like to read on it…thank you again

so what is economic profit? subtract everything?

looks like that based on mcf’s explaination